Administering Canadian Low-Interest Loans
Page Name |
Definition Name |
Usage |
---|---|---|
Create General Deductions Page |
GENL_DED_DATA |
(CAN) Assign low-interest loan deductions to an employee and specify the calculation method for the deduction. |
When an organization provides an employee with an interest-free or low-interest loan, the employee receives a taxable benefit equal to the amount of interest that would have been paid for the year at the government-prescribed interest rates, minus the amount of interest that the employee pays in the year, or within 30 days after the end of the year. This benefit has no taxable goods and services tax component.
The value of the taxable benefit changes throughout the year as the prescribed rate (which is set each quarter by the federal government) changes, and as the employee pays down the loan (and/or any interest).
Note: A loan also includes any other indebtedness. For example, if the employer purchases a computer for the employee and the employee proceeds to have payroll deductions for that computer, the company has made a loan for the computer's price less any employee down payments.
Taxable Benefit Calculation Example
Payroll for North America calculates the low-interest loan taxable benefit as follows:
Loan Balance x Prescribed Interest Rate % on Canadian Company Tax table
minus
Loan Balance x Loan Interest Rate % on Create General Deductions page for employee
equals
Annual low-interest loan taxable benefit for the employee
To calculate the actual amount of the taxable benefit on an employee's individual paycheque, the system divides the annual low-interest loan taxable benefit by the number of the employee's pay periods per year.
For example, on January 1, 2004, company VNB lends Joan Avery 10,000 CAD at a rate of 5 percent. The government-prescribed rates for 2004 are:
Quarter |
Percent |
---|---|
1st quarter |
8% |
2nd quarter |
7% |
3rd quarter |
6% |
4th quarter |
5% |
Joan chooses to pay back the loan through payroll deductions at 500 CAD per monthly pay period starting February. The system calculates the monthly low-interest loan taxable benefit as follows:
Pay Period |
Loan Balance |
Prescribed Interest Percent (Government Rate) |
Loan Interest Percent (Company Rate) |
Monthly Taxable Benefit |
---|---|---|---|---|
January |
10,000 CAD |
8% |
5% |
25 CAD |
February |
9,500 CAD |
8% |
5% |
23.75 CAD |
March |
9,000 CAD |
8% |
5% |
22.50 CAD |
April |
8,500 CAD |
7% |
5% |
14.17 CAD |
May |
8,000 CAD |
7% |
5% |
13.33 CAD |
June |
7,500 CAD |
7% |
5% |
12.50 CAD |
July |
7,000 CAD |
6% |
5% |
5.83 CAD |
August |
6,500 CAD |
6% |
5% |
5.42 CAD |
September |
6,000 CAD |
6% |
5% |
5 CAD |
October |
5,500 CAD |
5% |
5% |
0 CAD |
November |
5,000 CAD |
5% |
5% |
0 CAD |
December |
4,500 CAD |
5% |
5% |
0 CAD |
Total |
127.50 CAD |
The total taxable benefit for the year in this example is 127.50 CAD.
Home Purchase or Home Relocation Loan Calculation
The system does not calculate the taxable benefit of low-interest home purchase or home relocation loans. For these types of loans, the prescribed rate in effect at the time the loan is made (not the current quarterly adjusted prescribed rate) should be used to calculate the taxable benefit throughout the loan period, for up to five years. If the prescribed rate is lowered during the five-year period, the lower prescribed rate is used until such time as the rate goes up again. After five years, the prescribed rate at that time is used for the next five years, and so on.
Note: Home purchase or home relocation loan calculation is subject to change depending on legislated requirements.
Before you can specify an employee's loan percentage, you must perform and maintain the following setup steps:
Maintain prescribed interest rates and loan data.
Activate loan processing.
Establish loan deductions.